[HN Gopher] Open guide to equity compensation
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Open guide to equity compensation
Author : mooreds
Score : 142 points
Date : 2025-04-13 19:13 UTC (3 hours ago)
(HTM) web link (github.com)
(TXT) w3m dump (github.com)
| no_wizard wrote:
| This seems mostly geared toward private companies that grant
| equity. As it's part of the Galloway series that targets this
| audience that makes sense.
|
| I do wonder how much of this applies to RSUs granted by public
| corps
| neilv wrote:
| Would they be referring to that here?
|
| https://github.com/jlevy/og-equity-compensation/blob/master/...
|
| > Topics **not yet covered**:
|
| > - Equity compensation programs, such as
| [ESPPs](https://www.investopedia.com/terms/e/espp.asp) in
| public companies. (We'd like to [see this improve](#please-
| help) in the future.)
| GeneralMayhem wrote:
| Basically none of it. RSUs at public companies are as good as
| cash that just happens to be pre-invested. The tax implications
| are very simple (they're just regular income like getting paid
| in cash), and so are your legal rights (you're not much
| different from anyone who bought a share on the stock
| exchange). You should risk-adjust their value like any
| investment, but there's are very few if any sneaky things that
| can happen to pull the rug entirely.
| PopAlongKid wrote:
| Another resource I've found very useful (disclaimer - no
| affiliation on my part) is
|
| https://fairmark.com/compensation-stock-options/
|
| There are several books also available, including a 2014 book
| aimed at financial planners and tax advisors that I have on my
| shelf and find myself consulting several times a year, as it is
| still pretty relevant under today's tax law.
| cj wrote:
| As our 30 person startup has grown, I made a conscious decision
| to stop pitching stock options as a primary component of
| compensation.
|
| Which means the job offer still includes stock options, but
| during the job offer call we don't talk up the future value of
| the stock options. We don't create any expectation that the
| options will be worth anything.
|
| Upside from a founder perspective is we end up giving away less
| equity than we otherwise might. Downside from a founder
| perspective is you need up increase cash compensation to close
| the gap in some cases, where you might otherwise talk up the
| value of options.
|
| Main upside for the employee is they don't need to worry too much
| about stock options intricacies because they don't view them as a
| primary aspect of their compensation.
|
| In my experience, almost everyone prefers cash over startup stock
| options. And from an employee perspective, it's almost always the
| right decision to place very little value ($0) on the stock
| option component of your offer. The vast majority of cases stock
| options end up worthless.
| Swizec wrote:
| > The vast majority of cases stock options end up worthless
|
| My fav manager had a great way of phrasing this: "There are
| more ways for your options to be worthless than to make you
| rich"
|
| But I also personally know plenty of people who made off great
| with their startup equity. They're def not worthless.
|
| Ultimately I think you should never take an uncomfortable pay-
| cut to join a company _and_ you should maximize your stock
| compensation on top of that. Don 't forget other types of
| equity - brand, exposure to good problems, network.
| awesome_dude wrote:
| > But I also personally know plenty of people who made off
| great with their startup equity. They're def not worthless.
|
| I personally view Stock Options in the same way as lottery
| tickets - sure they might pay out big sometimes, and people
| do win lotteries, but, for the most part, they're going to be
| losers.
|
| There might be argument about the difference in how often
| stock options lose compared to lottery tickets, but that's
| missing the point.
| fragmede wrote:
| Sorta. You could definitely go in on something worthless
| that never gets any traction and end up with less than
| zero, as in, you owe money after the experience. But for
| every Stripe or Airbnb there's 100 more lesser known names
| that still pay out, not in the millions, but a couple
| hundred thousand dollars range, which is still enough to
| change most people's situation.
|
| Definitely look at them as worthless untill they're worth
| something, but the untold secret is the secondary and
| private market. SpaceX employees have gone that route and
| some are quite rich despite there not being an IPO. Again,
| the failure mode to be aware of is you could end up in debt
| and owe money which is worse than if you'd never played.
| cj wrote:
| > Definitely look at them as worthless untill they're
| worth something
|
| One (of numerous) problems with stock options is almost
| all stock option contracts require you to exercise within
| 90 days of leaving the company.
|
| Often times employees leave a company, and then need to
| decide within 90 days whether they will spend anywhere
| from $5-50k+ to exercise the options to keep the stock,
| otherwise you forfeit the options after 90 days.
|
| The stars really have to align for you to make money with
| options without risking/gambling your own capital by
| exercising them.
|
| Unfortunately secondary markets only exist for very large
| companies like Stripe. I'm not aware of secondary markets
| for small < 100 person companies, which is where you see
| the most blatant hyping up of stock option value.
| dgunay wrote:
| There are companies that will finance your options
| exercise in exchange for a cut of the earnings in the
| event of an exit. I haven't personally used one, but they
| do exist.
| fragmede wrote:
| and the most important thing someone told me is that 100%
| of $0 is $0. x% of a big number > $0
| fragmede wrote:
| I can't speak to their individual deals, but Hiiive,
| Forge, and ESO fund are all working with companies that
| aren't stripe sized.
|
| But absolutely no one should read this and think anyone's
| paper valuation is worth actual dollars until the money
| hits your bank account.
| awesome_dude wrote:
| > You could definitely go in on something worthless that
| never gets any traction and end up with less than zero
|
| Absolutely agree
|
| > Lesser known names that still pay out, not in the
| millions, but a couple hundred thousand dollars range
|
| FTR This is the same for lottery tickets, they don't all
| win the top prize (or a share of it), most will win a few
| dollars, some tens of thousands, and so on.
| ants_everywhere wrote:
| The main difference is that people often think they share a
| fate as a startup. They all have the same lottery tickets
| (in varying amounts) that pay out under the same
| conditions. After all, that's how managers often motivate
| the early employees.
|
| But since there are different _classes_ of lottery tickets,
| the payouts can change arbitrarily at the last minute
| depending on the specifics of the deals.
|
| So even after accounting for the fact that most lottery
| tickets don't pay out, you need to account for the fact
| that some within the same startup might pay out while yours
| don't. And there's no perfect way of knowing ahead of time.
| crote wrote:
| I think the main thing to remember is that you should
| _assume_ they are worthless.
|
| There's probably something like a 99% chance they are
| worthless, a 0.9% chance they are worth a decent holiday, a
| 0.09% chance it'll let you retire early, and a 0.01% it'll
| make you _somewhat_ rich. Worst of all, unless you 're the
| CxO you have very little control over the outcome.
|
| Equity is a nice bonus, but you might just as well treat it
| like the company giving you a lottery ticket for Christmas.
| Nobody is going to take a significant pay cut or work 80
| hours a week for a lottery ticket, so don't do it solely for
| the stock options either.
| candiddevmike wrote:
| Pre/post pandemic startup equity seem to have wildly
| different outcomes
| __turbobrew__ wrote:
| Even if the company has a successful exit lots of times the
| founders have different stock class than employees which allows
| them to cook the books in creative ways where employee stocks
| are devalued without affecting founder stocks.
|
| I personally went through a successful exit of a company where
| I was one of the early engineers and was privy to orchestrating
| the sale (working with potential buyers and consultants) and
| saw this happen.
|
| I now am granted stocks which are traded on the NYSE so nobody
| can cook the books without commiting securities fraud.
| carimura wrote:
| "Cooking the books" could mean many things but most people
| would interpret this as fraud. There are many exit scenarios
| that aren't fraud but rather stacks of preferential stock
| that get paid before common, who usually get paid last.
|
| What happened in your exit scenario?
| awesome_dude wrote:
| My read is that the poster felt that the accounting
| practices, which were likely legal and commonplace,
| violated _implied_ contractual obligations.
| Viliam1234 wrote:
| It's _technically_ legal -- the best kind of legal!
| __turbobrew__ wrote:
| That's correct, I don't believe anything illegal was done
| but certain things were done to dilute the employee share
| class which didn't dilute founder shares.
|
| Additionally there was some liberty on what "sale price"
| actually was in the contract. This may be common
| operation, but the sale price according to my contract
| was much lower than the amount of dollars which was
| exchanged for the company.
| SpicyLemonZest wrote:
| "Fraud" is a strong word, and there's nothing inherently
| wrong with having multiple share classes. But I really feel
| that preferred stock as implemented by most early stage
| startups is an intentional attempt to deceive employees.
| There's a lot of founders out there telling early engineers
| they're getting "0.5%" when they know full well that a $1B
| acquisition down the line is not going to put 5 million
| dollars in the engineer's pocket.
| sudoshred wrote:
| Playing both sides with this comment
| SpicyLemonZest wrote:
| I don't intend to be on the founders' side at all, I'm
| just not quite sure I'd throw them in jail over it. I'd
| definitely call it "cooking the books" comfortably.
| fnbr wrote:
| Can you explain? In most cases, preferences won't come
| into play, assuming you raise at a standard 1x preference
| and sell for more than you have raised. In that case,
| owning 0.5% should roughly translate into $5M (modulo
| dilution).
| __turbobrew__ wrote:
| See my comment further down. Im not going to go into any
| more details than that as the details of the sale are not
| public.
| Gamemaster1379 wrote:
| I got forced into working for some garbage startup at a job
| early in my career. The CEO was absolutely psychotic and
| never put much effort into hiding his motives.
|
| The guy gave me a "Pre selection" letter (bokded at the top
| that it was "NOT A LEGAL DOCUMENT") that I was selected to
| receive 1,000,000 shares, vested at 250k a year (no one year
| cliff into monthly). 1,000,000 of how many? Didn't say.
| Percentage? Nope. Was it 25% 3% .00003% Who knows!
|
| I eventually was forced out after him verbally abusing me,
| making unsubstantiated accusations about how I spoke to other
| employees, and doing things like asking me to clock out and
| continue to talk about work.
|
| I received two death threats after I quit. And, seven years
| later, I get a threatening letter falsely accusing me of
| defaming the company under random online accounts. After
| rejecting the allegations, I got a "settlement letter" that
| demands I forfeit all obligations, and can never talk about
| the employer again. It also explicitly stated I'd get $0 and
| that they "wouldn't appear at my place of residence" as my
| benefits.
|
| Last I saw the SEC audited them and said they had no revenue
| and no products to commercialize.
|
| They raised $6m on fundraising sites selling SAFEs, but had
| $800k in assets and $6m in debt. Oh, the most interesting
| part is the owner had the company paying his other computer
| repair business $5k a month for IT services.
|
| It really reenforced for me how meaningless the whole
| process. Working for that company was a lifetime mistake.
| yieldcrv wrote:
| > In my experience, almost everyone prefers cash over startup
| stock options.
|
| Good to know, because its common for the founder and hiring
| manager guilt trips to be _insane_.
| blitzar wrote:
| As your 30 person startup has grown, the (future) value of the
| stock has gone from $0.00 to not $0.
|
| When the value was zero, of course you had to talk up future
| value - you were selling something worth $0 for $1,000's. Now
| that it is worth something, it represents actual value for the
| employees to swap for salary, which is why you no longer offer
| as much!
| Aurornis wrote:
| > In my experience, almost everyone prefers cash over startup
| stock options.
|
| My experience has been a little different. We had a lot of
| people demanding both very high cash comp and then demanding
| very high equity packages on top.
|
| Giving people a sliding scale option did put some of the
| control back in their hands, but it also produced an analysis
| paralysis for some where they couldn't decide what to pick.
|
| > And from an employee perspective, it's almost always the
| right decision to place very little value ($0) on the stock
| option component of your offer. The vast majority of cases
| stock options end up worthless.
|
| Much of this is due to startups failing. Every random "startup"
| trying to pay people with options because the founders have no
| hope of success inflates this statistic.
|
| However another driver of this statistic is the extremely short
| exercise window upon quitting. People may work somewhere for
| 1-3 years but the company could be 5-10 years away from
| acquisition. Employees have to give the company money at time
| of quitting to get any equity, which few want to do.
|
| I know the common wisdom, but I also know that there are a
| couple local technology centered private Slack groups in my
| area where people will eagerly try to evaluate and possibly buy
| your options for local startups. They don't buy everything,
| obviously, but there is demand for the few cases where
| contracts allow transfer of the resulting equity.
| fnbr wrote:
| This is why I will never work somewhere with a short post
| termination exercise period (PTEP). If it's not at least 5
| years, ideally 10, they don't seriously consider equity
| something that employees are owed.
| babl-yc wrote:
| So would you trade your founder equity for a fixed salary? My
| guess is probably not.
|
| Equity is an extremely important factor for many candidates,
| especially more senior ones and executives.
|
| I would not pitch it as future value, and instead pitch as % of
| company. If it's a minuscule amount that doesn't move the
| needle in offer conversations, than perhaps you are not
| offering enough, or you're identifying candidates who value
| more predictable income than investment in the company.
| Alex3917 wrote:
| > And from an employee perspective, it's almost always the
| right decision to place very little value ($0) on the stock
| option component of your offer. The vast majority of cases
| stock options end up worthless.
|
| This isn't actually true from a historical perspective. The
| primary reason why the gap between the wealthy and and everyone
| is increasing is that employees started preferring cash
| compensation over equity. Joseph Blasi documented this in his
| book The Citizen's Share, and that book is why Elizabeth Warren
| recently passed legislation making it easier for employers to
| give equity to their employees.
| grandempire wrote:
| I often had startups offer me a number of shares with no
| explanation for the percentage ownership or the number of total
| shares.
|
| I said I have to value them at zero without more information
| and they would act all offended when I asked for more
| information (happened at least 3 times).
|
| This suggests to me that founders either don't understand the
| mechanics themselves or are preying on lack of financial
| understanding.
| dymk wrote:
| It's the latter.
| wyldfire wrote:
| On this April 13 in these United States, I can't help but think
| of the incredible inconvenience of how RSUs and shares sold seem
| to be calculated for the sake of income taxes. Please just add it
| up and send me the bill. I don't want to pay more than what's
| due. And I don't want to cheat. For whatever reason, the typical
| tax interview software guesses wrong or has insufficient inputs
| when I feed it info from employer + brokerage. So what remains
| feels like guesswork with liability on both ends.
| toast0 wrote:
| RSUs aren't really that bad, unless your employer does sell to
| cover in annoying ways. Net share withholding works out super
| simple, the shares that weren't withheld are at the brokerage
| with the correct basis, and the income and withholding are
| reported accurately on your w-2.
|
| Options do get pretty nasty if you exercise and hold, when the
| fair market value is higher than the fair market value; because
| then you have to have an AMT return and a regular return and
| reconcile them.
|
| ESPP with a discount was pretty bad the last time I had it; the
| brokerage said they were specifically required by IRS rules to
| report the wrong cost basis, and you had to adjust it when you
| sold, or you'd have the discount reported on your w-2 and again
| as a capital gain. Maybe that changed, capital gains reporting
| has changed over time.
| jan3024-2r wrote:
| Just remember this is the forum run by the dudes that set up
| Sillion CON Vallee bank.
| j45 wrote:
| Statistically, stock options are often lottery tickets that the
| holder may have a tiny say in.
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